Thursday, January 13, 2011

Simon Johnson is one of my favorites... if you have not read his piece in the Atlantic from a few years ago entitled "The Quiet Coup", it comes with my highest recommendation.

The crash has laid bare many unpleasant truths about the United States. One of the most alarming, says a former chief economist of the International Monetary Fund, is that the finance industry has effectively captured our government—a state of affairs that more typically describes emerging markets, and is at the center of many emerging-market crises. If the IMF’s staff could speak freely about the U.S., it would tell us what it tells all countries in this situation: recovery will fail unless we break the financial oligarchy that is blocking essential reform. And if we are to prevent a true depression, we’re running out of time.

He has some interesting thoughts via Yahoo Tech Ticker today, but for long time readers it will be familiar material. Oligopolies. Cross pollination between government and banking. (Former OMB Director Orszag now is embedded within Citigroup, while Bill Daley jumps from JP Morgan back into the White House). TBTF (too big to fail). The massive subsidization in funding costs similar to what Fannie and Freddie enjoyed by being an implicit government ward. The fact our investment banks can sit at the discount window and suck in the Fed's easy money to go speculate. (these are not commercial banks!) Heads they win, tails they still win. Moral hazard to the nth degree. (does anyone believe if Goldman or Bank of America blew up tomorrow the government would not ride to the rescue with taxpayer funds?) It would all be so amusing if it was some 3rd world country. The only person apparently above the fray is the FDIC's Sheila Bair who declared this morning she has no intention of heading to Wall Street once her gig is done in D.C.. That's 1 of them. For everyone else - let the turnstile continue.

Anyhow, here are the videos - do not watch if you just ate lunch. Even better... as long as the stock market goes up, who cares right? That's the path they want you to be on.

(I) Bill Daley's Appointment Proves "The Bankers Have Won Completely"

President Obama's new chief of staff, Bill Daley has been greeted with cheers and jeers - from both sides of the aisle - for his strong business and banking ties.

The fact that President Obama's top aide is the former Midwest chairman of JPMorgan Chase proves "the White House fails to understand that, at the heart of our economy, we have a huge time-bomb," according to Johnson.

Why is Daley's appointment so troubling to Johnson?

"These banks again have unfettered access to the very top of the political decision making in the United States and, reflects the fact their status is completely undiminished, despite all the mistake they made and all the damage they did to the rest of the economy," he tells Henry in this clip.

That time-bomb he was referring to is another credit and banking crisis. Without more reform and a break-up of the 'too big to fail' banks, which is even less likely with Daley as chief of staff, Johnson is convinced banks are destined to repeat the same mistakes. "They have every incentive" to "blow themselves up," he laments, predicting another credit crisis will occur in the next three-to-seven years.

(II) Now U.S. Taxpayers are Subsidizing Goldman's Investment in Facebook

Although most Americans may think that the financial crisis and Wall Street bailouts are now just an embarrassing and regrettable moment in the country's history, this is far from the case, MIT Sloan School of Management professor Simon Johnson says.

In fact, the taxpayer subsidies for the major Wall Street banks continue to this day.

These subsidies, professor Johnson says, take the form of special access to the Fed's "discount window" and ongoing, unwritten "Too Big To Fail" guarantees that the US taxpayers will cover any major losses the banks incur--by bailing them out all over again.

These subsidies allow the big banks to borrow money at a lower cost than their smaller competitors, and, thereby, win market share and produce higher profits.

Bizarrely, professor Johnson adds, the subsidies mean that the US taxpayer is even subsidizing Goldman Sachs' recent $450 million investment in Facebook, one of the hottest tech companies on the planet.

Goldman made the investment in Facebook using money borrowed from the Fed at subsidized rates. If the investment works out, of course, Goldman and its shareholders will keep all the profits. If the investment fails--and enough other things go wrong that Goldman needs another bailout--US taxpayers will pick up the tab.

This heads-I-win, tails-you-lose arrangement contributed to the last financial crisis, professor Johnson says--the crisis that led to the bailouts and almost brought the economy down. And the fact that the arrangement hasn't changed--that US taxpayers are still subsidizing Wall Street risk-taking and implicitly agreeing to cover all major losses--means that Wall Street has just gone right back to gambling up a storm again.

And that, professor Johnson predicts, will eventually lead to another financial crisis.

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